The rise of China - opportunities and challenges for Asian from a Vietnam perspective

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The rise of China: opportunities and challenges for ASEAN from a Vietnamese perspective

Pham Thai Quoc*

Ser nearly thirty years of instituting reforms, China has become a potent global force, and its emergence as a superpower has become a source of both anxiety = hopes for countries constituting the Association of Southeast Asian Nations = On the one hand, the rise of China provides opportunities for ASEAN to in- ‘exports and diversify export markets On the other, there are territorial disputes == China and some ASEAN member countries in the South China Sea This paper

«< that the rise of China is inevitable and unstoppable Nonetheless, ASEAN member

=s can be better-off by strengthening cooperation with China At the same time, “ser ASEAN should strengthen its economic and political ties with other countries

Sde 2 counterweight to China’s growing influence in the region

| S> instituting reforms and opening and integrating itself with the world economy, <-ssiby after accession to the World Trade Organization, China boosted its economic The rise of China has brought both opportunities and challenges for many coun- sia and the world This research paper focuses on opportunities and challenges

and Vietnam in view of China’s emergence as an economic power

fication: FOO

= China’s emergence, China-ASEAN cooperation, China-ASEAN tension

rise of China

rise of China can be seen as follows:

‘Chinz has been one of the fastest growing economies in the world, with output

=xpansion averaging some 9 percent anually over the past two decades period 1993-1997, China’s average gross domestic product (GDP) growth

il percent per year, three times higher than the world average From 1998 =sent, although Asia and the whole world faced many difficulties, China’s

has maintained high growth rates from 8 percent to 9.5 percent annually

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64 Quoc: The rise of China, opportunities and challenges for ASEAN

Keeping high growth rates in many years, China’s economic power increased at a steady pace In 2004, China’s GDP ranked as the sixth-largest economy in the world

b China is a world producer

From a poor country with inadequate supply of food and consumer goods, China has become the world’s top producer of many products like cereals (470 million tons, 2004), cotton (6.32 million tons, 2004), oil seeds (30.75 million tons, 2004), meat (41.2 million tons, 2004), cloth (24.87 billion square meters), cement (970 million tons, 2004), and television sets (36.4 million) China also ranked prominently in world total output of electricity (1135.6 billion kW), chemical fertilizer (28.2 million tons), and automobiles (5.2 million) From 1995 to 2004, China’s proportion in world industrial production increased from 5 percent to 12 percent

c China is a world consumer

With its huge population, China is fast becoming the world’s biggest market China’s percentage in total world consumption for most commodities has been

steadily increasing From 1998 to 2005, the proportion of China in the world raw

materials and energy consumption for industrial purposes increased very quickly

(Table 2)

d China is a world trader

In 1978, China’s total trade was only US$ 20.6 billion, ranking 32th in the world

At the end of 2004, the amount reached Us$ 1154.7 billion, ranking 4th in the world

(Table 3) In 24 years (1980-2004), China’s share in world exports soared from 1.0 percent to 5.8 percent In ten years (1993-2003), China’s industrial machinery exports increased from US$ 4.2 billion to Us$ 83 billion China’s exports of computer

components and peripherals increased from US$ 0.7 billion to Us$ 41 billion, while

exports of electronics and telecommunications equipment increased from US$ 12.3

billion to Us$ 89 billion [Gilboy 2004:39]

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Table 2 China’s percentage of the world consumption (%) Commodity 1998 2003 2005 Aluminum 10.3 18.6 21 Beef and veal 9.8 12.6 ‘Cement 47 Coal 27.2 31.0 30 (Cell phone user (mobile phone) 75 20.1 Cigarette 30.8 34.8 (2002) Computer 3.3 6.1 Copper 10.4 19.7 20 Cotton (raw) 222° 32.7 37 Electricity 8.0 10.2 Fish 22.1 32.3 (2001) Hair-care product 3 3.9 ice cream 14.1 19.1 Microwave 7.9 121 Petroleum (crude oil) 5.5 T7 8 Pork 48.8 50.8 Poultry 18.6 19.2 Rice 34.5 32.8 32 Soda (drinks) 29 3.9 Soybeans 14.2 19.6 Crude Steel 26 Steel (finished) 16.2 26.9 Television set 23.6 23.2 (2002) Vacuum cleaner 13 1.1 (2002) Washing machine 10.6 18.0 (2002) Wheat 16

Seerce: Fortune, October 4, 2004: 68, 69

‘Scorss from China in total imports of Japan increased from 1.4 percent in 1970

Š 3 percent in 2002 At the same time, imports from China in total imports of

‘Usited States increased from almost 0 percent to 11.1 percent Imports from

Sez in total imports of the European Union increased from 0.6 percent to 7.5 (Tables 3 and 4)

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Table 3 China’s share in world exports (%) 1980 1990 2000 2003* China 1.0 19 3.9 5.8 Germany 10.5 12.1 8.6 92 Japan 71 8.5 15 64 US 12.0 11.6 12.1 10.4 Source: “China: international trade and WTO accession”, IMF Working Paper No 04/36: 15 *January to June Table 4 Imports from China in total imports (%) 1970 1980 1990 1995 2000 2002 Japan 1.4 3.1 SAE 10.7 14.5 18.3 United States 0 0.5 Bee 6.3 8.6 1L1 European Union* 0.6 0.7 ae 3.8 6.2 BS: Source: “China: international trade and wTo accession”, IMF Working Paper No 04/36: 15

*Excluding Intra-EU trade

In addition to large amounts of foreign investment flows to China, its trade

balance was keeping surplus at a high level As a result, China’s foreign reserve

increased to more than US$ 200 billion in 2004, reaching US$ 710 billion at the

first half of 2005

China’s phenomenal rise has pushed it toward a higher position in world economy and brought many opportunities and challenges for the rest of the world in general, and ASEAN in particular

2 Opportunities and challenges for ASEAN

ASEAN countries have been getting opportunities as neighbors of a fast-

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_+.=TA means investors can come to ASEAN, put up their factories in ASEAN, and sell == products to the China market.” Recently, more and more Chinese companies | S=ee been investing abroad At the end of 2003, China’s accumulated foreign direct | ==sstment (FDI) outflow reached uS$ 32.2 billion ACFTA is also a favorable legal

Ss>ework for ASEAN to absorb more FDI from China

Second, reforms in the southwest of China have been expanding vigorously In

"Se vast, trade between China and ASEAN was mainly through sea-lanes Today more

_<=s4 and rail networks connect the two areas: both sides are currently conducting "=sssruction works connecting China and ASEAN, such as the international economic "secridor from Kunming (Yunnan, China) to Ho Chi Minh City to Singapore; Naning _§=znsxi, China)_-Hanoi-Haiphong (Vietnam), Naning-Bangkok The economic "== connects some cities and provinces and ports along the coast of Southern China “5 cities and ports of northern Vietnam When these economic and transportation | =2rks are completed, the interaction in terms of trade, investment, and tourism | Seacen China and ASEAN will expand greatly, to the benefit of both China and

| ===4N nations

Besides accelerating the development of its West and Southwest Greater | Sea China has been closely cooperating with five ASEAN nations—Vietnam, | Sees, Cambodia, Thailand, and Myanmar—in exploiting natural resources and

= the environment in the frame of the Greater Mekong Subregion (GMS) tion

` Third, the rise of China has created beneficial conditions for ASEAN economic

ery after the crisis From 1990 to 2003, China imported more than Us$ 2,500 t8 from all over the world Now, China’s imports accounts for one-fifth ofAsian

and one-nineteenth of world imports In 2000, China imported only US$ = billion from ASEAN, but this increased to US$ 45.6 billion in 2004 A substantial | s=cunt of China’s imports is considered a motivation for many economies in Asia the world) to recover and develop China has been considered as the economic =s< behind the development of many East Asian economies

| And fourth, Chinese experiences in such fields as trade liberalization and FDI

ion are useful and applicable for new ASEAN members

= Challenges for ASEAN

As developing economies, China and ASEAN have similarities in terms of trade structure and production structure for export Both have advantages like cheap

and rich natural resources Both are looking at common potential markets,

2s the European Union, the United States, and Japan, to expand their exports |S present, China has replaced ASEAN as the main producer and supplier of cheap tured goods for the region In absorption of foreign capital, both sides are

to get more investments from North America, Europe, and Japan and from ian economies, e.g., Korea, Taiwan, and Hong Kong Thus, the competition

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between them may even be fiercer in the near future After WTO accession, China is

clearly outstripping ASEAN FDI inflows to ASEAN from 2001 to 2004 stood at Us$ 19.37 billion, Us$ 13.73 billion, US$ 20.30 billion, and US$ 26.5 billion, respectively

Meanwhile, China’s figures were US$ 49.6 billion, Us$ 52 billion, Us$ 53.5 billion,

and Us$ 60.6 billion, respectively—much higher than ASEAN’s Exports from FDI sector accounted for 53 percent of China’s total exports More FDI means China gains an advantage over ASEAN in export Clearly, ASEAN commodities are facing difficulty in competing with Chinese goods in the markets of China and Japan, as these have been produced by American or Japanese companies in China before they are exported back to American and Japanese markets

Table 5 China and ASEAN:

share of global manufactured exports (%)

ASEAN China

1994 44 a2

2003 44 53

Source: Business Week, February 28, 2005: 23

China’s economy from 1979 to the present seems to have gone through “cycles”

in its development In 1983, 1988, and more recently in 2004-2005, China found

itself in “too hot” situations Supply of many goods exceeded demand in the domestic market In June 2005, according to the China Ministry of Trade, more than nine hundred kinds of goods were in oversupply The situation is clearly seen in such goods as textiles, footwear, automobiles, cell phones, etc Oversupply often leads to a rocket discount just to sell The big gap between supply and demand in the Chinese market may have negative impacts on some ASEAN markets if local market organizers don’t catch up with up-to-date information and the new situation in time for policy reactions

China’s furious development has been taking place along with sector changes As more new-model and high-tech industries come to the East and Southeast, the comparatively less advantaged industries move from the East toward the West and Southwest It is then possible that the relatively older technologies from China have been transferred to some new, less developed ASEAN members 2.3 The “China threat” theory

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is sure to worry some: would China use military force to take over whatever it considers its own? This is a potential factor of instability in the region ASEAN companies find it too difficult to compete with their Chinese

“erparts because of the following reasons:

= China is a huge country; the cost of land in China is more competitive ® China has comparative advantage in terms of human resources It can maintain

lower labor costs for a longer time because labor can move elsewhere in search of higher income

= China has a great potential market It is a very attractive factor for FDI

inflows

However, many people think that ASEAN should not worry too much about China

==" its rapid growth has also made it increasingly dependent on foreign resources

=== zs oil, coal, rubber, and other raw materials To maintain its development,

must nurture better and closer relations with its ASEAN neighbors This is

recently China adopted the following guidelines: “be friendly with neighbors”, == peace with neighbors”, “be in harmony with neighbors”, and “get rich together seighbors” To achieve common benefits, China has been looking for new to strengthen cooperation and build effective mechanisms to solve possible radictions with ASEAN

portunities and challenges for Vietnam

zs continental borders and coastal lines with China Thus, the opportunities

'enges for Vietnam from the rise of China are more evident

Between 1991 and 2004, Vietnam-China bilateral trade increased from US$ 37.7

ee to US$ 7.191 billion (more than 190 times in 13 years) After accession to

"0 the growth of China’s international trade accelerated It is estimated that

‘Wietnam-China trade will reach US$ 8 billion in 2005, much more than us$ 5

2s projected That is why in the state visit to China of Vietnam President Tran = Laong on July18-22, 2005, both sides agreed to raise the 2010 Vietnam-China

‘eget from us$ 10 billion to us$ 15 billion

8 million, with 346 projects [Kawai 2004] Besides the opportunities for trade with and receiving more FDI from China, Vietnam must also face

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Table 6 Vietnam-China trade balance, 2001-2004 Year Vietnam trade deficit* (% changes)

2001 21 xế

2002 633 2142

2003 1.373 107.2

2004 1.720 25.2

Source: Vietnam Ministry of Trade

*In million US$

First, in Vietnam-China trade, Vietnam suffered a large trade deficit The increase

in the total value of imports from China to Vietnam is much faster than the increase in the total value of exports As a result, Vietnam’s trade deficit with China increased from US$ 211 million in 2001 to Us$ 1.721 billion in 2004 The proportion of deficit from China in total national trade deficit soared from 17.7 percent in 2001 to more than 30 percent in 2004 The reason for the deficit is that the main exports of Vietnam were only three kinds of raw materials: rubber, coal, and crude oil Exports of such materials accounted for 71.7 percent of total Vietnam exports to China in 2004 Meanwhile, the main Vietnam imports from China are manufactured products like refined oil, machinery equipment, spare parts of motorbikes, etc

Table 7 Exports of three kinds of raw material (rubber, coal, crude oil) from Vietnam to China, 2000-2004 (million US$)

Year 2000 2001 — 2002 2003 2004

Exports of three raw materials 8233 66l3 819.6 1,043.70 1,963.20 Percentage from total exports 53.6 46.6 54.8 59.70 71.70

Source: Vietnam Ministry of Trade

Second, after WTO accession, China has been carrying out some new policies” that make it difficult for Vietnam traders The new policies are as follows: | a Reducing some policy preferences in border trade (no 50 percent tax reduction | for trading with Guangxi) while increasing quality control and food safety criteria for agricultural products [Vietnam Economic Times, September 21

2005]

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in Beijing, making business in trade of vegetable and aquatic products more

difficult

c Step-by-step, China has abolished the policy of tax preferences in cross- border trades From 2004, cross-border exports from Vietnam to Guangxi (China) received no tax preferences (50 percent value-added tax reduction) Moreover, to get tax preferences in the frame of the Early Harvest Program (EHP), Vietnamese traders need to secure a certification of original goods (c/o), and the two-sided trading contracts should be made by the central government rather than by the local government The place of C/o issuance in Vietnam has been moved from some main border mouths to Hanoi and Ho Chi Minh City, and other procedures have jacked up costs higher than

the benefit from EHP preferences As a result, EHP did not lead to increase in

exports from Vietnam to China _< Conclusions

The rise of China is an inevitable phenomenon Along with this, China’s progress instituting reforms, opening up to and integrating itself with the world economy | Zeve pushed China-Asia relations into a new stage Clearly, this has also brought “seportunities and challenges for ASEAN in general and for Vietnam in particular With

rise of China, ASEAN needs to be more active in finding solutions to difficulties

| zd challenges ahead A stronger ASEAN would play a more important role in the ==sion To consolidate its own strength, ASEAN must do the following:

2 Institute reforms and open and increase trade and investment within the region

aT

» Participate and act actively in international and regional organizations to expand relations with other world superpowers to balance China’s growing influence in the region E

4 Strengthen ASEAN-China cooperation to share the risk with China

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References

Deckers, W [2004] “China, globalization and the World Trade Organization”, Journal of Contemporary Asia 34: 102-119

Gilboy, G.J [2004] “The myth behind China’s miracle”, Foreign Affairs 83(4):

33-48

Hale, D [2003] “China takes off”, Foreign Affairs 82(6): 36-53

Hale, D [2004] “China’s growing appetites”, National Interest 76:137-147 Hsiung, J.C [2003] “The aftermath of China’s accession to the WTO”, Independent

Review 8(1): 87-112

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